Overall risk appetite remains the dominate theme as European policy makers seem to move closer to a comprehensive solution to the current Debt crisis. Yesterday the European Commission laid out a proposal that simultaneously addressed multiple stress points including new EU governance, bank recapitalization, stability and economic growth strategies and potential usage for the EFSF. In another forceful speech, EC President Barroso stressed the need for a coordinated approach to raising bank capital ratios--a plan that would lessen the contagion aspect of the European debt crisis. However, we would stress that while the official comments sound very encourage, there is a noticeable lack of details forthcoming. A fact that the markets have been more than happy to overlook, yet it's the details that have gotten Europe in trouble before. The other bright spot were comments from Slovakia's opposition that had voted down the EFSF enhancements on Tuesday, stating that the move was more political in nature, attempting to force the ruling party to call for early elections in 2012. The primary Slovakian opposition then made it very clear that a repeat vote would occur before Friday and they would now ratify the EFSF in a second parliamentary vote. Even Bundesbank President Weidmann comments that a Greek debt write-down cannot be ruled out (which could be as high as 39% from various estimates) failed to halt the broad unwind of safe-haven trades. Risk correlated FX remains well supported, heading into the European open. Given the trend of news flow and lack of scheduled economic data we don't expect a significant shift in risk sentiment today.
The FOMC Sept 20-21 meeting minutes came basically in line with the market's expectations. From the minutes we suspect that following Operation Twist, the fed may be willing to follow it up with a small strategy to help the weak economy. Fed members remain concerned over the dreary state of the US labor markets. Without improved in jobs, there is little expectation that the Fed will become less concerned over the state of growth conditions (i.e recession). The minutes stated that the risks to the growth outlook were significant and tilted to the downside. In addition, stress in the financial markets (which we suspect is due to Europe) and the possibilities of deflation, keep QE3 in the Fed's back pocket for now. In regards to another round of large scale asset purchases, the minutes stated as potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted.
AUD was the big mover in Asia, as employment data surprised to the upside at 20.4k vs. 10k exp, while unemployment rates fell to 5.2% from 5.3% (prior/exp). The further evidence that the Australian domestic economy is performing better than anticipated, triggered a round of AUD short covering, pushing the pair to 1.0233. AUD rates quickly adjusted to the better data with the market now pricing in roughly 17.4bp vs. 29.5bp of cuts prior to the data print. The employment data put a serious dent in expectation of a cut in 2011. The AUD was hit briefly as China trade data surprised to the downside as Exports came in at 17.1% yoy vs. 20.5% exp. and Imports printed at 20.9% yoy vs. 24.6% exp. Clearly the China lower than expected Chinese export growth was driving by eroding demand from Europe.